Shell drilling rig left Alaska to avoid taxes

ANCHORAGE, Alaska — Shell’s Kulluk oil drilling rig left Dutch Harbor in December to avoid the prospect of millions in taxes, a Shell official revealed Saturday morning in testimony to a Coast Guard investigation panel.

Questions over the timing of the Kulluk’s departure have been swirling since the Dec. 31 grounding of the rig in a fierce Gulf of Alaska winter storm.

Before Saturday’s testimony by Sean Churchfield, operations manager for Royal Dutch Shell in Alaska, Shell had maintained that taxes were “a consideration” but not the driving factor for the move’s timing.

“Our preference for the timing was to be gone before the end of the year, driven by the economic factors,” Churchfield said in Saturday’s testimony. He was being questioned by Lt. Cmdr. Brian McNamara, the legal adviser to the lead Coast Guard investigator.

“Why specifically was the end of the year such a concern?” McNamara asked.

“The end of the year to my understanding was when the tax liability potentially would have become effective,” Churchfield answered.

Another consideration, he said, was the cost of maintaining the rig in Dutch Harbor. But the potential tax hit was the bigger expense, he said.

Shell decided Dec. 7 to move the Kulluk from Dutch Harbor to a Seattle shipyard for major off-season maintenance, including the replacement of the rig’s cranes, Churchfield said. Shell evaluated doing the work in Alaska to avoid the move but a bigger shipyard was needed.

The Kulluk left Dutch Harbor Dec. 21 under tow by a single vessel, the Aiviq. The main tow gear failed Dec. 27 as the seas were picking up and repeated efforts to connect it to various vessels that came to help couldn’t get the Kulluk under control in the escalating storm.

An earlier witness said Shell had a four-day window of good weather when it left Dutch Harbor. A weather study for Shell showed similar weather for December and January, Churchfield said. The drilling rig and its tow vessel were both ready to go and Shell wouldn’t have approved the departure unless everything was in order, he said.

Churchfield said he didn’t know how much the Alaska tax would have been other than “millions.” Alaska law provides for an annual 2 percent tax on the value of property used in oil and gas exploration, production and pipeline transportation. The date for assessing the value of covered properties is Jan. 1.

State officials have said they hadn’t determined whether Shell would owe the tax on a mobile drilling unit while in port.

Shell couldn’t get a slot in a Seattle shipyard for the crane work until February, Churchfield said. An earlier Shell official testified that Shell arranged for a temporary berth in Bellingham, Wash., until the shipyard space opened up.

Shell also faced taxes in Washington state, Churchfield said.

At a press conference in Anchorage the day after the grounding, Churchfield was asked if Shell left when it did because of the Alaska tax potential.

“No, the reason we boated down there was actually to get the off-season repairs done,” Churchfield said. “Once we had the rig ready for tow, prepared and inspected, was when we moved down to give us the maximum time to ready for the 2013 season.”

In later interviews, a Shell spokesman said the tax issue was considered but not the primary factor.

The Kulluk needed to be back in Alaska by June for this year’s drilling season. Shell no longer plans to drill in Alaska this year while it regroups but intends to return at some point, officials have said.